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Improving the liquidity of investment trusts

Ahead of the RDR many investors have raised concerns about the liquidity of investment trusts, or the ease with which investors can trade their shares. Investment trusts have a limited number of shares, and while it may be easy to buy into these vehicles it can be harder to get out of them.

Supporters of investment trusts have rejected this idea. They highlight the fact that investment trusts are able to issue new shares or buy back existing ones to help improve liquidity, as well as lower the discount at which such shares trade to the net asset value (NAV) of a trust’s investments.

According to investment trust trade body the AIC, the largest investment trusts will tend to have the greatest liquidity. Which sector they fall into plays less of a role, the AIC maintains.

The AIC says: “There isn’t necessarily a strict correlation between sector and liquidity. The size of the company is more of a factor, but it can also depend on the individual investment company. Some funds are able to manage supply and demand by buying back shares when demand tails off and issuing new shares when demand is strong.

“There are a number of very popular companies which are regularly issuing new shares to meet demand and a few companies even aim to trade close to net asset value (NAV) by issuing new shares and buying back shares according to supply and demand, but this won’t be for everyone.”

Of the top 20 most traded investment trust stocks, eight have less than £1bn in total assets

Diversity

The 20 largest investment companies come from a diverse range of industry peer groups, including the AIC’s Global Growth and UK Growth sectors, but also more specialist areas such as Global Emerging Markets, Private Equity, Sector Specialist: Commodities and Natural Resources and Sector Specialist: Infrastructure.

According to AIC data based on 289 investment trusts excluding venture capital trusts (VCTs), the average trust sees £308,000 of shares traded a day. However, for the nine vehicles with a market capitalisation of £1bn or more, the average trade of shares is £2.46m a day, which drops to £939,000 for the 24 funds with a market capitalisation of between £500m and £1bn.

This seems to support the idea that the larger the investment trust, the more liquid it is. However, that is not true in all cases.

Of the 20 largest investment companies the top two – the £4.18bn 3i Group and the £2.63bn Alliance Trust – are unsurprisingly also the highest traded stocks, according to data from Winterflood Securities. However, the £1.26bn BlackRock World Mining trust is the third most traded fund for the year to July 3, yet it is also only the ninth largest investment company.

Of the top 20 most traded investment trust stocks, eight have less than £1bn in total assets. The top 50 include a number of specialist sector companies, particularly in infrastructure and emerging markets.